MONEY MATTERS: Will economic growth follow confidence surge?

By Kevin B. Murray

The Daily Record Newswire

U.S. Consumer Confidence increased in November by the largest amount since April 2003. The Conference Board's index increased to 56 from a revised 40.9 in October. This increase far exceeded the most optimistic forecasts of economists and placed the index at a four month high.

While one robin does not a spring make, good news with the November CCI followed by good news in the jobs market report, could be the needed catalyst to accelerate the U.S. growth rate from the 2 percent in the third quarter. At a minimum, it substantially lowers the risk of an imminent double-dip recession.

The CCI is issued monthly by the Conference Board, and is based on a survey of 5,000 households. It was started in 1967 and is currently benchmarked to 1985=100.

The index measures the degree of optimism that consumers feel about their personal financial situation as well as the overall state of the economy. The increase in November indicates consumers are more positive about their own and the nation's income and employment prospects.

This bodes well for the thus far lukewarm recovery picking up steam, because when consumers feel better about the economy, they spend more, fueling growth. The CCI is closely watched by investors as a leading indicator of future economic activity.

The November survey responses were concluded on Nov. 15 and indicate consumer optimism was rising just as the holiday shopping season kicked into high gear. Since the holiday season accounts for as much as 40 percent of annual retail sales, the increase could not be better timed to spur the economy. Early indications show holiday spending has already exceeded expectations.

Released shortly after the CCI, the November Nonfarm payroll increase of 120,000, together with upward revisions of 75,000 additional jobs in September and October, lowered the unemployment rate to a 2.5 year low at 8.6 percent. While one month's data is not a trend, these numbers do provide reason to be cautiously optimistic.

Consumer expenditures usually make up about 70 percent of the value of our economy. The improvement in the CCI should help sustain and increase household purchases. Retailers and manufacturers look closely at the CCI when making their inventory and production decisions. Increased sales lead to increased production which can lead to higher employment. Sales reports of "Black Friday" and "Cyber Monday" (Nov. 25 and 28) both were above expectations. Investors react positively to CCI increases as indicating future economic growth. The recent run up of equities is no doubt partly a result of the increase in CCI.

Unfortunately, one strong CCI is too thin a reed to rely on and while the increase in the CCI was very impressive, the absolute level of the index is still anemic by historical standards.

During the period from December 1992 to June 2008, the CCI was higher in every month then it is currently, in fact it exceeded 100 in every month during the period between May 1996 and September 2001. The 1990s were of course the longest period of sustained economic growth in all of American history.

The National Bureau of Economic Research tells us the last two recessions were between March and November 2001, and December 2007 and June 2009. In 16 of those 26 recession months, the CCI was higher, often much higher, then it is today. The trend in the CCI has been down since March of this year.

The question of whether the November surge is an anomaly or a trend reversal will not be known for several months. The October CCI was the lowest reading ever except for times within a declared recession. The large jump in November's CCI and employment report, coming at a time many were predicting we were either already in a second recession or shortly would be so, has greatly allayed those fears.

Just as bad news can feed on itself and lead to a downward spiral to recession, good news can feed on itself and lead to an increase in economic growth. An increase in our growth rate would have a positive impact on our national deficit by both reducing expenditures (unemployment compensation, etc.) and increasing tax collections (without raising rates).

Mark Twain said "reports of my death have been greatly exaggerated." Similarly, reports of the inability of the U.S. economy to grow in the future, or of the death of capitalism as we know it, are greatly exaggerated.

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Kevin B. Murray is a vice president at Karpus Investment Management, an independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. He can be reached at (585) 586-4680.

Published: Thu, Dec 8, 2011